June 2019

TDS UNDER SECTION 194A ON PAYMENT OF 'INTEREST' UNDER MOTOR ACCIDENT CLAIM

PRADIP KAPASI | GAUTAM NAYAK | BHADRESH DOSHI
Chartered Accountants

ISSUE FOR CONSIDERATION

Under the Motor Vehicles Act, 1988 (MVA), a liability has been cast on the owner of the motor vehicle or the insurer to pay compensation in the case of death or permanent disablement due to a motor vehicle accident. This compensation is payable to the legal heirs in case of death and to the victim in case of permanent disablement. For the purposes of adjudicating upon claims for compensation in respect of motor accidents, the Motor Accident Claims Tribunals (MACTs) have been established. The MVA further provides that in case of death the claim may be preferred by all or any of the legal representatives of the deceased. The quantum of compensation is decided by taking into consideration the nature of injury in case of an injured person and the age, monthly income and dependency in death cases. The MVA contains the 2nd Schedule for compensation in fatal accidents and injury cases claims. While awarding general damages in case of death, the funeral expenses, loss of consortium, loss of estate and medical expenses are also the factors that are considered.

 

The claims under the MVA may involve delay which may be due to late filing of the compensation claim, investigation, adjudication of claim and various other factors. A provision is made u/s. 171 of the MVA to compensate the injured or his legal heir for the delay, which reads as under:

 

“Section 171. Award of interest where any claim is allowed.

Where any Claims Tribunal allows a claim for compensation made under this Act, such Tribunal may direct that in addition to the amount of compensation, simple interest shall also be paid at such rate and from such date not earlier than the date of making the claim as it may specify in this behalf.”

 

CBDT circular No. 8 of 2011 requires deduction of income tax at source on payment of the award amount and interest on deposit made under orders of the court in motor accident claims cases. The issue has arisen before courts as to whether tax is deductible at source u/s. 194A on such interest awarded by the MACTs u/s. 171 of the MVA for delay.

 

While the Allahabad, Himachal Pradesh and Punjab and Haryana High Courts have held that such payment is not income by way of interest as defined in section 2(28A) and no tax is deductible at source u/s. 194A, the Patna and Madras High Courts have taken a contrary view, holding that such payment is interest on which tax is

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